Italy’s Meloni just hit a major political milestone. Former leaders say economic reform must follow

Speaking to CNBC on Friday, two former prime ministers of Italy said reform is necessary to boost the Mediterranean country’s stuttering economy.

On Friday evening, Meloni’s coalition government, which took office in October 2022, held a rally in the port city of Bari to mark its becoming Italy’s longest-serving cabinet since World War II.

“In these years we have worked to increase employment, reduce unemployment, support families and businesses, strengthen security, manage public finances with seriousness, and restore to Italy weight and credibility on the international stage,” Meloni said in a translated statement on Friday.

Italy’s economy grew by 0.5% over the course of 2025, below the euro area average of 1.5% and one of the slowest rates in the bloc. The Italian employment rate remains solid, but youth unemployment stood at 18.9% in July, above the euro area average of 14.9%.

“This, of course, is a failure,” Gentiloni said. “In the last two or three years, we see the [spending] power of families going down, and this is a reason for the government not to be so satisfied as it’s looked.”

“It is true that power softens extreme positions,” Monti said, addressing the view that Meloni has proved more pragmatic than her populist, right-wing pitch to voters had suggested.

“That is why nobody now…would go for exit from the EU or exit from the euro. But if there is lack of willingness to accept some political confrontation, this gives yes more stability, but a lack of growth and deterioration of society, and even the youngest and brightest in the country wants to leave it,” Monti said.

Enrico Letta, who led an Italian coalition government from 2013 to 2014, said that “not so good” economic performance and fraught inter-European relations were dampening sentiment toward Italy despite its internal political stability.

“Stability is a value, but what is really important is the stability of the relationship among European countries. I was not happy [about] all this summer of conflicts on immigration, on Schengen, and so on,” the dean of the IE School of Politics, Economics and Global Affairs told CNBC.

European nations must prioritize cooperation on immigration, trade wars, security and inflation, and finalize the EU’s long-awaited Savings and Investments Union and single regulatory framework if the bloc wants to attract more international investment, Letta said.

Meloni inherited an Italy that was politically divided and fraught with fiscal problems.

At the time, concerns were rife about the country’s budget deficit, which stood at 7.2% of gross domestic product. When the deficit swelled to 7.4% of GDP in 2023, Italy was put under the European Union’s excessive deficit procedure, which sets a reference value of 3% for government deficits.

Since then, the deficit has fallen sharply, coming in at 3.1% in 2025. The European Commission expects the figure to fall to 2.9% this year, thanks to higher employment and wages delivering greater government revenues.

As the deficit has fallen, so have Italian government bond yields, with the spread between Italian and German bond yields narrowing drastically since late 2022 — suggesting investors now demand a lower risk premium to hold Italian bonds over their German counterparts. The spread between French and German bond yields has widened significantly over the same period.

However, Rome — like many of its G7 counterparts — still has a massive debt problem. Italy’s debt-to-GDP ratio reversed its downward trajectory in 2024, according to EU data, driven mainly by a Covid-era policy giving tax credits for housing renovations. In 2025, debt-to-GDP stood at 137.1%, and is forecast to rise to 138.5% this year.

While Italian government borrowing costs have been impacted by global sell-offs in the wake of geopolitical shocks such as the U.S.-Iran war and investor fears around inflation, yields remain notably lower than they did prior to Meloni taking office. Bond yields move inversely to prices.

“The surprise of Giorgia Meloni’s premiership has been that she has largely governed as a fiscal pragmatist rather than a populist,” Lauren Hyslop, investment manager at Mattioli Woods, told CNBC in an email on Friday.

“Markets have rewarded that approach through tighter bond spreads, rating upgrades and lower borrowing costs. Italy has undoubtedly regained credibility with investors.”

“Italy used to carry a political instability premium almost by default. That has faded considerably,” agreed Ken Egan, senior director for sovereigns at ratings agency KBRA — citing its long-serving government, more predictable fiscal path and continued reform delivery.

Italian medium- and long-term bonds have held up relatively well compared to other developed economies amid the global rout, Egan said by email. Italy’s 10-year yield has jumped 62 basis points this year, but its 10-year total return — accounting for both price moves and interest income — is the best among its European peers, he noted.

However, Jason Borbora-Sheen, a co-portfolio manager across income strategies at Ninety One, told CNBC in a call on Friday that while there is “something in the stability and continuity of the political leadership” in Italy, there was a self-fulfilling component to the turnaround in the country’s fiscal picture.

“The more stable the country is, the less or more reduced the debt burden is, the more likely the populace is to be happy with the incumbent, and vice versa,” he said.

In spite of that, Borbora-Sheen told CNBC his team does not see a particularly compelling investment case for Italian government debt.

“The fundamental story has been very positive, but we think the market appreciates that,” he said.